Is there madness in Obama's method?

The recession – and Barack Obama's timid response – has overshadowed his honeymoon period, says Stephen Foley

President Barack Obama has barely built his team of cabinet members and senior staff but he has already conducted his first high-profile sacking. And the extraordinary thing about the firing of Rick Wagoner is that he was not a member of government.

Mr Wagoner was the chief executive of a private company, General Motors, beloved by his employees, respected by their union and supported by the board. But GM is one of an increasing number of companies operating on handouts from the taxpayer, and one Friday last month, Mr Wagoner was told that the President would like him to resign.

In retrospect, this may well look a Rubicon moment, symbolic of the US having crossed from an era of laissez-faire capitalism to a new kind of managed economy – with unpredictable consequences, not least for the Presidency. After the first 100 days of a leadership being forged out of a great economic crisis, has Mr Obama put himself on the hook not just for the overall performance of the economy, but for each layoff, for each interest rate on US bank credit cards, for each home repossession?

On the hoof, Mr Obama is dramatically refashioning the US economy – but perhaps it is testament to his methodical approach to the financial crisis that we even have time to stop and think about these longer-term questions. The panic of last September, a startled-looking George Bush appearing on television to address the crisis only after days of silence – that chaos is long past.

Of course, nationalisations and semi-nationalisations were bequeathed to Mr Obama, the legacy of last autumn's panics. But the new administration has shown itself less leery of using the levers available to it than anyone expected. And it is not just fulminating radio hosts from the right who see the government entwining itself with the private sector in ways that will be hard to reverse.

Nowhere is the appropriate extent of the government's embrace being more fiercely debated than over Wall Street. A furious public, demanding retribution against the feckless bankers, would sanction just about any amount of intervention, but Mr Obama is tiptoeing still.

For sure, he has adopted a more sternly moralising tone when addressing the finance industry. But Wall Streeters largely scoffed when the President described their bonuses as "shameful", and they noted that during the debacle over bonuses at the insurer AIG, the President shied away from backing a punitive tax aimed at clawing them back. Mr Obama is insistent on much tighter regulation of banks and of bankers in the future, but the test of just how tough he is willing to be, that is still to come.

For now, some critics charge that, far from intervening too much, the administration has been too timid. No chief executives have been forced out, yet some of the largest banks in the land are still perilously close to insolvency.

The government is promising still more cash to any bank that can't raise it privately, money that will certainly extend the tentacles of government deeper into the private sector.

An increasingly influential group of opponents including Paul Krugman, the Nobel prize-winning economist, are arguing that the tottering bank giants, the ones dubbed too big to fail, should no longer be propped up and instead should be fully taken under the control of the government.

One answer to the critics is that a methodical approach is better than superficially attractive "bold" action. Another – which no one in the administration would say out loud – is that they are hoping something might turn up. By waiting, there is the chance a nascent economic recovery could make some of those toxic assets look less toxic and those weak banks look less weak. Such is the state of things that it can be counted as vindication simply that the financial system has not gone into meltdown under the rookie President.

On Wall Street, the concerns are more prosaic. They just don't believe Tim'll fix it. When Tim Geithner, the baby-faced Treasury Secretary, unveiled his over-hyped plan in February, it provided so little detail on the crucial issue of how to rid the banks of their toxic investments that the stock market slumped 5 per cent.

For all the flurry of announcements during the transition, the Obama administration simply did not hit the ground running as fast as expected.

It wasn't until six weeks later that Mr Geithner could produce a plausible mechanism for buying the toxic assets, by marrying $1 trillion (£680bn) of public and private money and having taxpayers shoulder most of the risk of losses should the economy sour further.

The urgency is clear. By the time Mr Obama marks his first 100 days, more than two million jobs will have disappeared from the US economy.

And yet. There is a sense that progress is being made. Political expediency dictated that Mr Obama spend the first half of his 100 days warning that the economy was in such a mess that a quick rebound was unlikely.

Economic necessity dictated that he spend the second half pointing out the flickers of hopeful news. Without a sense that the worst may be passing, consumers would continue to shun the shops, and business managers to retrench, swelling the ranks of the unemployed. The President has never borrowed Franklin Roosevelt's line that the only thing to fear is fear itself, but he intuitively understands the message.

The delivery of a $787bn economic stimulus package signed into law within a month of taking office was a formidable legislative achievement even if its negotiation was at times unedifying and its passage exposed the naïvety of some of Mr Obama's aspirations to bipartisanship. The whole spectacle was a wake-up call to the White House that normal politics has not been suspended by Mr Obama's election, and that small-government Republicans will not simply lay down their arms and start singing Kum Ba Yah. Without bipartisan cover, the stimulus package locks the President's future political fortunes more tightly than ever to the performance of the economy.

That became even more true after the publication of his budget, in which he simultaneously plunked down money for green energy programs and universal health care and promised to cut the deficit in half in four years, a circle he could only square by using some optimistic assumptions on economic growth by the middle of his term.

On modestly more conservative forecasts, the independent Congressional Budget Office reckons Mr Obama is underestimating the total budget deficits of the next decade by $2.3 trillion.

So everything is connected to everything else. The passage of the economic stimulus helped restore confidence, which will magnify improvements in the economy. But fragile confidence could be up-ended if the hole in the banking system is not filled, and that depends on the depth and duration of the recession.

If the stimulus plan and a bank rescue knit together, Mr Obama could catalyse an early economic recovery. If not, the pieces could fly apart in dangerous fashion.